Many companies pay good money for their executives to attend conferences where at least one speaker can usually be relied upon to say, 'Change is the one constant in the modern world'. Change is the last thing those who run Australia's superannuation industry want to embrace.
And little wonder. They inhabit a cosseted world in which the money pours in each day, thanks to a combination of government compulsion, massively costly tax concessions and the misguided backing of key Labor and union leaders. The upshot of this assistance — far greater than the car industry enjoyed — is that Australia now has the world's fourth biggest funds management industry, yet only the 12th largest economy.
But the foundations of this empire are coming under a growing attack. Most criticism focuses on how the tax concessions create an expensive form of upper class welfare, while being of little value to most other people. The harmful effect of compulsory super's artificial expansion of the finance sector is also attracting attention.
The Abbott Government shows scant concern about either aspect. Its terms of reference even stopped the Commission of Audit from including the concessions in its long list of recommended cuts to direct spending on welfare, education, science and many other areas.
However, the Commission's chair Tony Shepherd, who formerly headed the Business Council of Australia, says these concessions should be cut. So does former Coalition leader John Hewson, some business economists, financial planners and other beneficiaries of the existing system. Treasury head Martin Parkinson recently expressed concern about who gains most from the system. Parkinson, who is being forced to resign by Abbott in December, asked, 'If it's a wealth creation tool, who is ultimately benefiting from this?'
Fairfax Media gave a clear answer on 22 May when it reported a tax lawyer as saying, 'These are people with $10 million to $20 million in self-managed super. They've funded their retirement several times over. They don't need concessions.' Another adviser said, 'There are probably 30 different strategies motivated by tax minimisation rather than a desire to self-fund one's retirement.'
The Fairfax report said that almost 9200 self-managed super funds have a balance of more than $5 million, a rise of 76 per cent in the past three years. Some have over $100 million. Given that 92 per cent of SMSFs have only one or two members, many could easily have an income from super of $500,000 a year or more, from age 60 when no tax applies.
Before then, the standard tax rate on super is a flat 15 per cent. For someone on a salary and other non-super income of $250,000, for example, this compares to a marginal rate of 49 per cent following the Budget's new temporary levy. In a twist that tips the whole purpose of means testing on its head, those who pay no tax on other income below $18,200 pay the 15 per cent on their compulsory super contributions and earnings.
Wealthy beneficiaries often claim they are entitled to pay no tax because they paid some while working. But they still have a big income. Unless they pay tax on it, younger people will have to fund more of the growing cost of government services for retirees who are often better off financially. Many low and middle income employees would be better off if their compulsory contributions to super were instead paid out as higher take-home income when they are often struggling to bring up a family, pay off a mortgage, education fees and so on.
According to conservative Treasury projections, scrapping the concessions should increase revenue by over $35 billion in 2016–17, rising each year. This money could be used to improve living standards for the workforce via tax cuts and improvements to health care, education and infrastructure. Moreover, reputable studies show that the cost of the concessions outweighs the likely savings on the age pension costs.
Compulsion has another bad result. It distorts the flow of resources away from more productive uses. It encourages fund managers to trade existing financial assets rather than help mobilise capital for productive new investment to boost growth in a country with an ageing population.
To its credit, Industry Super Australia, a group of funds run jointly by union and employer representatives, identified this problem in a report, Finance and Capital Formation in Australia, which it submitted to the current Murray inquiry into the financial sector. The report shows the sector overall is now nearly three times less efficient at utilising economic inputs to facilitate capital formation than before compulsorily super began.
Likewise, a recent Reserve Bank study shows super funds made no discernable contribution to funding new investment in Australia's mining boom between 2003 and 2012.
Despite the global financial crisis, the industry super report also notes that the finance sector grew faster than any other industry in Australia over the past 20 years, to 10 per cent of gross national product. Yet research by the Bank of International Settlements concludes that economic growth can suffer after a finance sector accounts for more than 6.5 percent of GDP.
The above concerns have not stopped Labor's Shadow Treasurer Chris Bowen from promising not to change super for five years after the next election.
Walkley award winning journalist Brian Toohey is a columnist with the Australian Financial Review.